(b)lines Ask the Experts – Do ERISA Cutback Provisions Apply to 403(b)s?

“I work with a governmental non-Employee Retirement Income Security Act (ERISA) 403(b) plan that is contemplating a number of retirement plan changes, some of which I am concerned might result in a cutback in protected benefits under Code Section 411(d)(6). Do the Experts have any thoughts in this regard?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Well, first of all, technically, 411(d)(6) does NOT apply to governmental plans (nor does it generally apply to ANY 403(b) plan that is not subject to ERISA—the 403(b) regulations describing the “nonforfeitable” requirement of section 403(b)(1)(C) cross-reference section 411 and the regulations, but those do not apply to governmental or church plans so long as they meet the pre-ERISA vesting rules. See Code Section 411(e)), so you need not be concerned with protected benefits under section 411(d)(6) per se. However, this does NOT mean that governmental plan sponsors can just feel free to change their plan design anytime at their discretion. Such plan sponsors should evaluate all of the following issues before making any plan design changes:

1)   The impact of other federal laws on their ability to make changes: for example, the Age Discrimination in Employment Act (ADEA) would affect the ability of a plan to target older employees for contribution/benefit reductions.

2)   The impact of state contract or other laws, such as laws governing state retirement systems that may restrict amendments to such plans. Such laws would generally be preempted in an ERISA plan, but since governmental plans are not subject to ERISA they may be subject to such state laws. And some state laws are actually MORE restrictive than 411(d)(6) with respect to the protection of existing benefits.

3)   Required plan document amendments, and any design modifications, which would require that the plan document be amended in a timely fashion. In addition, the existing plan document language may provide for certain protections of existing benefits that thus, may be only amended prospectively. This may particularly be true of pre-approved documents. And finally, certain plan designs, such as money purchase plans, may also restrict the types of design changes that can be made.

In addition you should also be aware that there is currently proposed IRS guidance and litigation in the area of what, in fact, constitutes a governmental plan. Thus, the plan sponsor with which you are working should consult with retirement plan counsel with specific expertise in these areas to a) verify that the plan in question is, in fact a governmental plan, and b) whether the desired changes can be made in the context of all the issues referenced above.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.